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A Guide to Fixed Income Investing September 2026

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Staying ahead of the curve

Welcome to Ahead of the Curve in partnership with MFS Investment Management. In this e-book, we’ll delve into all things fixed income and help you understand how you can use the asset class to build more diverse and resilient client portfolios.

With interest rates on the rise, the phaseout of AT1 hybrid bonds on the horizon and yields at their highest levels in years, there has never been a better time to assess your fixed income allocations. The content spans four different chapters.

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Staying ahead of the curve

1 In the first Q&A discussion, MFS managing director- head of wholesale distribution James Langlands sits down with Evidentia senior asset consultant Ron Mehmet to discuss fund selection and dispelling adviser misconceptions around bonds.

Benoit Anne, senior managing director and head of market insights at MFS, takes the lead in our second chapter to explain why Australian investors may be missing on attractive income streams from global bonds.

In the third, head of client strategy Jon Barry explores why financial advisers should consider global bonds and address their historically underweight positions to the assets.

We hope you find this e-book a useful and insightful resource that helps you and your clients to better understand bonds and fixed income.

Finally, MFS co-chief investment officer of fixed income Pilar Gomez-Bravo explains why higher yields have restored the income many investors believed they had lost from their fixed income allocations.

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Using ﬁxed income to stay ahead of the curve

Using fixed income to stay ahead of the curve We explore how thoughtful fund selection can help advisers harness ﬁxed income to build stronger client portfolios. MFS Investment Management managing director and head of wholesale distribution, James Langlands, joins Evidentia senior asset consultant Ron Mehmet to discuss the key considerations when assessing ﬁxed income strategies.

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Using ﬁxed income to stay ahead of the curve

Fixed income is seeing renewed interest among financial advisers after a period in the doldrums but with this new enthusiasm, advisers may be left wondering where to begin.

“The theory is once every 10 years you get a negative return in bond funds, but in actual reality it’s actually every 14 years.

result, around 75 per cent of active global bond managers had outperformed passive ones over the long term.

“Yes, there has been a negative return which has been a turn-off for some investors. But they’ve got to understand it only happens at times when the central banks are jacking up interest rates because they may have an inflation problem or there is some other issue that’s happened and they need to tighten monetary policy and it impacts bonds for a short period of time.

“Passive is replicating the index, you end up with a lower quality of the index because the active managers can go after the better bonds and avoid the ones that look pretty shaky.

“Once the hiking is over, people pile into bonds because then bonds settle down, they come back down over time and you’re picking up a slow capital gain as well as that regular income.”

Fund selection considerations Putting all this into practice, Mehmet shared lessons from his research house experience to explain to advisers what they should consider for their client portfolios and the red flags to avoid in a fixed income fund. This will heavily depend on the needs of the client and their outlook, whether they are an accumulator or in retirement and how comfortable they are with taking risks.

Viewed as complex by many advisers and with misconceptions rife, Mehmet says his first step is always to educate them and help them understand how vehicles can fit in within a portfolio. “Some people think ‘it’s all too hard’ and stick with cash or term deposits but bonds can provide that ballast for when things change in equity markets. So I try to give people confidence to invest in bonds because they can provide that regular income and stability,” he said. One of these fears stems from experiences during 2022 when they may have seen a negative return but Mehmet said this typically only occurs every 14 years, far less than many people may think.

Another misconception stemmed from the difference between active and passive fixed income funds where Mehmet said active funds could outperform their counterparts, unlike equity versions, because they can invest in the better-quality bonds. As a

“It’s a very different picture [to equity] because of the complexity and make-up of fixed income.”

“This will determine whether they take a

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Using ﬁxed income to stay ahead of the curve

fund manager who is absolute return and one who is more benchmark-focused which takes into a broader range of instruments. “If they are quite conservative, there are managers who compare themselves against the global benchmark or there are other managers who have a pretty high yield and can provide a very good buffer.” When it comes to selecting a specific fund for their client portfolios, Mehmet said the biggest considerations for advisers should be around the track record and experience of the manager, particularly as ever-increasing numbers of new, less experienced managers enter to market. “You should have a manager who has been through a number of interest rate cycles and has the experience and know what type of strategies to put in place to enhance returns for clients. Also that they have teams who are varied in their skillsets and knows what lever to pull and to avoid.

Ron Mehmet Senior Asset Consultant Evidentia

James Langlands Managing Director, Head of Wholesale Distribution MFS

“A manager with a long track record and a big team would give me a lot of comfort as a core fixed income addition.” Using an active manager also means they can react far quicker than a financial adviser to central bank or geopolitical actions and the adviser can relax knowing their allocation is being managed.

Laura Dew Editor Money Management

“These days, when there is volatility or a geopolitical event, it all happens within several weeks rather than months so if you allow the active manager to do the work for you then you can rest easy that they will take the appropriate action on the portfolio rather than you physically having to move that money.”

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Lowering volatility with a global approach to fixed income MFS Investment Management senior managing director Benoit Anne explores the beneﬁts of incorporating global bonds into a portfolio and the role they can play in supporting diversiﬁcation, income and long-term investment outcomes.

Lowering volatility with a global approach to ﬁxed income

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Lowering volatility with a global approach to ﬁxed income

Investors and financial advisers should consider looking beyond Australia and adopting a global allocation to fixed income. This can enhance diversification and potentially lower volatility, according to MFS Investment Management.

corporate bonds, mortgage-backed securities (MBS) and securitised debt.

While advisers may prefer to rely on familiar homegrown options, solely allocating to Australian bonds within their fixed income allocation could leave investors with a lack of diversification and mean they potentially miss out on attractive yields from fixed income sectors around the globe. Instead, global bonds can help to lower portfolio volatility and provide investors with a diversified range of fixed income assets. At one end of the global risk spectrum sits low-risk government bonds and US Treasuries while for investors who are willing to take more risk, local currency emerging market debt would be a potential option, along with global high yield bonds. In the middle, opportunities can be found in global

Speaking to Money Management, Benoit Anne, senior managing director and head of market insights at MFS, said: “There are so many benefits to having a global approach to fixed income. When you only have a home bias, you can miss out on a lot of global opportunities. The benefit of this broad diversification is that there are lots of macro developments that are unsynchronised and a global manager is going to be able to take advantage of those discrepancies and divergences. “For example, the Federal Reserve is set to cut its policy rate quite aggressively over the next year but the European Central Bank is no longer looking to lower its interest rate anymore. So this creates a big divergence in monetary policy, a big driver for currency movements and opportunities for active managers.”

The second benefit of an allocation to global fixed income sits within the broader range of investment options that advisers open themselves up to which can simultaneously reduce the risk level of a portfolio. “Global bonds broaden your investable universe quite considerably as you are no longer restrained by a finite number of securities in the domestic market which can create concentration problems. Corporates may also opt to issue bonds in multiple different currencies and being invested globally means the manager is going to be able to invest in the particular issuance and currency that better suits their portfolio. “Your risk may be higher if you invest only in Australia so you can lower or risk manage your volatility with a global mandate.” Another factor at play is that public fixed income is offering more attractive starting yields at this point of time than in the recent past and offers an alternative to the

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popular private credit funds given it lacks the illiquidity problems affecting that asset class. While private credit has seen high demand in recent years, regulatory concerns raised by ASIC more recently combined with questions about their transparency have left some Australian investors hesitant to invest. “Private credit has been tremendously popular in the past decade and it really took off at a time when yields in public fixed income were terribly low so it made total sense” Anne said. “We believe that now the situation has changed dramatically and yields in public fixed income are a lot higher. “We have seen some concerns emerging around portfolio liquidity and some headlines suggesting some cracks may be appearing in private credit. It still makes sense as part of a broad strategic asset allocation but public fixed income could be considered as an attractive alternative. “What we are hearing from clients is that they are no longer looking to increase their

Lowering volatility with a global approach to ﬁxed income

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Lowering volatility with a global approach to ﬁxed income

private credit exposure, they say they have enough so there’s seemingly a change of appetite.”

friendly right now so we are buying fewer government bonds and prefer global corporates which in our view are positioned to do well.”

Using global bonds in portfolios At MFS, the firm runs a range of diversified multi-sector fixed income products and Anne said these vehicles allow investors to focus on their clients’ needs rather than worrying about the underlying asset allocation. We believe having a manager who can tactically switch between the different sectors of fixed income at the opportune time is an advantage compared to an adviser trying to navigate them all by themselves and needing to stay across all the market movements. “Using multi-sector vehicles provides another lever to generate returns, the manager can decide when to switch between sectors based on market fundamentals. How much we allocate to one sector depends on the level of investor needs and on market conditions, for instance the global backdrop is looking

When considering a potential global bond allocation compared to researching a domestic vehicle where advisers may already have a pre-existing underlying knowledge, Anne recommended it was essential to ensure the respective portfolio management team was backed by a strong research team given the differences between the various markets. “The knowledge base of the management needs to be higher, they need to have deep research capabilities especially if you are considering areas like emerging market debt because different exposures can hurt you if you don’t have investment staff on the ground in those areas or know what you are doing.” While some commentators have disparaged the 60/40 allocation more

recently, Anne maintains it remains a worthwhile investment allocation. “Fixed income remains a safer asset class than equities and can be useful to manage your defensiveness. It can also outperform equities in times of market stress so yes, at this point in time, I would say 60/40 remains attractive.” Anne also addressed the cash vs. fixed income debate. “Compared to being in cash or term deposits, the yields are considerably higher and with central banks cutting rates then the returns on cash will go down further over time whereas you can get a capital appreciation in your bond portfolio as rates move lower.”

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Exploring the benefits of investing in global fixed income In this Q&A we explore why global bonds could be worth considering for Australian investors.

Exploring the beneﬁts of investing in global ﬁxed income

Jon Barry, FSA, CFA Senior Managing Director, Head of Client Strategy MFS

James Langlands Managing Director, Head of Wholesale Distribution MFS

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Exploring the beneﬁts of investing in global ﬁxed income

In this Q&A we explore why Australian investors should consider global bonds and address their historically underweight positions.

indicating a strong positive relationship between their performance.

How do the historical returns of global bonds compare to Australian bonds? One might expect that returns from global and Australian bonds would differ over time given the different forces at play in global bond markets. Interestingly though, benchmark returns from global bonds and Australian bonds have been remarkably similar in the longer term.

With exposure to a diverse range of issuers and sectors, an allocation to global bonds can allow investors to

potentially better manage risk while also providing more opportunities to generate returns above the benchmark (alpha). We believe these properties make global bonds an attractive option for investors

Over the past 15-years, the annualised return for the AusBond Composite Index was 3.54 per cent, while the Global Aggregate Bonds (AUD hedged) delivered a similar return of 3.66 per cent, albeit with lower volatility over this period. In addition, the correlation between the monthly returns of the Bloomberg Global Aggregate Index and the Bloomberg AusBond Composite Index is 0.79,

Source: Bloomberg. Data as of 31 December 2025. Global Agg yield-to-worst does not reflect any cost of hedging to AUD

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Exploring the beneﬁts of investing in global ﬁxed income

looking to diversify their fixed-income portfolios while maintaining competitive returns. Yet many Australian investor portfolios are underweight global bonds.

This diversification can help investors spread risk across different geographies, sectors, and credit qualities, potentially leading to more stable returns over time.

Why should Australian investors consider global bonds? Investing in global bonds offers a significantly broader opportunity set compared to Australian bonds. As highlighted below, the global bond market, represented by the Bloomberg Global Aggregate Index, has a market value of AUD $111,881 billion, compared to the Bloomberg AusBond Composite Index, which stands at AUD $1,717 billion. This vast difference in market size underscores the depth and diversity of the global bond universe.

Moreover, the global bond market offers a variety of durations and yields, allowing investors to tailor portfolios to specific risk and return preferences.

Compared to the Australian bond market, the global bond market provides exposure to a wider range of sectors and issuers.

Have global bond managers been able to generate greater alpha compared to Australian bond managers? Global bond managers have historically demonstrated greater alpha generation compared to Australian bond managers, which can be attributed to the broader opportunity set available in global fixed income markets. For example, the Bloomberg Global Aggregate Index includes 3,180 tickers, while the Bloomberg AusBond Composite Index includes only 219 tickers. The Bloomberg Global

Aggregate Index includes a more diverse set of sectors, such as Treasuries (54 per cent), Mortgage-Backed Securities (MBS) (9 per cent), and Industrials (9 per cent), compared to the Bloomberg AusBond Composite Index, which is heavily concentrated in Treasuries (46 per cent) and Local Authority bonds (35 per cent). We believe this broader opportunity set allows global bond managers to diversify their portfolios more effectively, capture opportunities across different regions, and take advantage of varying economic cycles and interest rate environments. The results in the chart below highlight that global bond managers have utilised that wider opportunity set to generate consistent excess return or alpha over time. We can see that from December 2007, global bond managers have achieved a mean 3-year rolling excess

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Exploring the beneﬁts of investing in global ﬁxed income

return of 0.69 per cent compared to 0.56 per cent for Australian bond managers. This underscores the resilience and adaptability of global bond strategies, which can leverage a wider opportunity set and employ dynamic asset allocation across various global bond sectors. Additionally, we believe net-of-fee returns from bond strategies are generally higher compared to equity strategies, as bond strategies typically have lower fees. This further enhances the attractiveness of global bond managers for investors seeking consistent alpha generation over the long term. How do starting yields impact the returns of global fixed income investments? Starting yields play a crucial role in determining the subsequent returns of global fixed income investments. History shows there is a strong historical relationship between starting yields and subsequent 5-year annualised returns for

Source: eVestment

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Exploring the beneﬁts of investing in global ﬁxed income

the Bloomberg Global Aggregate Index (AUD hedged).

for investors to monitor yield levels and market conditions when making investment decisions.

In prior periods where unhedged global bond yields were in the 3-4 per cent range (comparable to where yields are today), subsequent 5-year total returns for AUD hedged investors have ranged between roughly 6.0 per cent to 9.0 per cent. However, it is important to note that some of that higher return was due to a benefit from hedging during periods when Australian cash had significantly higher yields than other currencies found in the global bond index such as US dollars, Euros and Japanese Yen. While cash rates today for these currencies are closer to those in Australia, we would still expect some return benefit from hedging. This relationship highlights the importance of entry points in global fixed income investing. Higher starting yields generally indicate better potential returns over the medium term, making it essential

In the current environment, with starting unhedged yields as of 31 December, 2025, at 3.52 per cent*, investors may find global bonds particularly attractive. These yields, combined with the diversification benefits and competitive historical returns of global bonds, make them a valuable addition to a well-rounded investment portfolio. What are the key takeaways for investors considering global fixed income? In our view, investing in global fixed income offers several advantages, including a broader opportunity set, competitive returns, and diversification benefits. The global bond market’s vast size and variety of sectors provide investors with more options to tailor their portfolios to meet specific investment goals and risk tolerances. Historical data, as shown in this paper,

demonstrates that global bonds have delivered returns similar to Australian bonds over the long term, with comparable levels of risk. Additionally, the strong correlation between the two markets suggests that global bonds can complement Australian bonds in a diversified portfolio. Finally, the relationship between starting yields and subsequent returns underscores the importance of timing in global fixed income investing. With current starting yields at attractive levels, now may be an opportune time for investors to consider adding global bonds to their portfolios. By doing so, they can potentially enhance returns while managing risk through diversification. *Source: Bloomberg. Monthly data from 31 January 2000 through 31 December 2025. Global Agg = Bloomberg GlobalAgg Index. Past Performance is no guarantee of future results. Pre-GFC = January 2000 through January 2007. GFC = February 2007 through August 2009. PostGFC = September 2009 through December 2025.

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The renaissance in traditional ﬁxed income strategies

The renaissance in traditional fixed income strategies For the first time in years, fixed income investors no longer have to choose between income and diversification.

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The renaissance in traditional ﬁxed income strategies

For the first time in years, fixed income investors no longer have to choose between income and diversification, according to Pilar Gomez-Bravo, Co-CIO Fixed Income at MFS Investment Management.

higher inflation, people still remember the experience of 2022. The market’s first reaction is often to assume correlations between equities and bonds will turn positive again, meaning fixed income won’t provide the same diversification benefit,” she said.

After a decade of ultra-low interest rates and questions about bonds’ role in portfolios, higher yields have restored what many investors believed had been lost: meaningful income and the potential to cushion equity market downturns. MFS co-chief investment officer of fixed income Pilar Gomez-Bravo said the asset class continues to play an important diversification role, although investors need to remain mindful of the prevailing market environment. “At its core, if you have a recession or a slowdown in growth, fixed income is likely to provide a diversifying impact to equities. However, if the scenario is one of significantly

Gomez-Bravo said the conditions required for a return to very high inflation are not as prevalent as they were in late 2022, but noted that investors had not experienced sustained inflation for many years before that period. “The return of very high inflation came as a shock. At MFS, we’ve analysed what level of inflation would be required for equity-bond correlations to become meaningfully positive again. Our research suggests inflation would need to exceed around 6.5 per cent before diversification benefits are materially reduced,” she said. “Even if inflation remains somewhat higher

than it was in the past decade, we believe long-term correlations should remain relatively low, allowing fixed income to continue providing diversification benefits. And, of course, investors are once again receiving meaningful income from the asset class now that yields are higher.” A return to traditional strategies

According to Gomez-Bravo, the choice between unconstrained and traditional fixed income strategies largely depends on the yield environment and the opportunity set available. For many years, when yields were extremely low and central bank rates hovered near zero, investors increasingly turned to unconstrained strategies in search of returns above cash. “Today, yields have normalised to levels that, in many cases, are the highest we’ve seen

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The renaissance in traditional ﬁxed income strategies

in the past 20 years. As a result, there’s less need for unconstrained strategies, where volatility and drawdown risk can be higher because these cash-plus approaches often involve taking on more credit risk.”

“That’s why we’re seeing more focus on traditional fixed income solutions in the current environment,” she added.

comprehensive fixed income solutions, where they can trust the manager to make those allocation decisions on their behalf.”

The appeal of diversified fixed income

In this environment, diversified fixed income solutions can be particularly compelling, she said.

She added that without the diversification benefits provided by duration, overall portfolio risk can also increase. “It’s not that one approach is better than the other. It depends on your long-term expectations for yields and whether you believe those diversification benefits will continue to accrue. “Right now, we’re seeing something of a renaissance in more traditional fixed income strategies – those with greater benchmark awareness, albeit with varying degrees of flexibility – rather than purely unconstrained approaches.” When yields are elevated and there is potential for interest rate cuts, investors generally want duration exposure working in their favour.

MFS is also seeing growing investor interest in diversified multi-sector fixed income strategies. “These trends tend to move in cycles. If you’ve been in the industry long enough, you’ll see different client preferences emerge at different times. There are periods when advisers want to make the asset allocation decisions themselves. They feel confident deciding how much exposure they want to high yield, investment grade, Australian bonds and so on.” Over time, however, Gomez-Bravo said some advisers recognise they may not have the resources or expertise to make those allocation decisions consistently and optimally. “That’s when they begin looking for more

“They rely on asset allocation as a source of alpha and allow experienced managers to take advantage of market dislocations,” she said. “An active manager with a strong investment process and a constant presence in the market can often respond to those dislocations more quickly than an individual investor can on their own.” The overlooked value of security selection

One aspect of global fixed income that is often overlooked, according to Gomez-Bravo, is security selection, which she describes as a highly resilient source of alpha. “Many investors view global fixed income as such a broad universe that they assume

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The renaissance in traditional ﬁxed income strategies

security selection plays a limited role. After all, the global aggregate benchmark can contain around 20,000 securities. As a result, people often underestimate the value of security selection, believing that performance is driven primarily by macroeconomic factors,” she said.

She noted that downside risks in fixed income can often outweigh upside potential, making it critical to capture every available source of alpha.

“The point at which it becomes more systemic is when banks take on greater exposure to direct lending institutions and private credit managers.”

“Doing so can make portfolio performance more resilient and potentially less volatile than that of global fixed income strategies that rely less on security selection.”

MFS closely monitors the extent to which banks lend to shadow banking and private credit entities, “because banks are leveraged and systemically important”.

Watching private credit

“We track, for example, how much exposure regional banks have to private credit firms and how those exposures evolve over time … Today, those exposures remain manageable, but they are growing fairly quickly. It’s possible that within a few years this could become a bigger headline issue.”

“In reality, security selection is one of the most reliable sources of alpha. It tends to be consistent, compounds over time, and can generate meaningful excess returns by identifying the right bonds and issuers. Importantly, this can be true across different market environments, whether conditions are favorable or challenging.” However, she emphasised that generating alpha through security selection requires a strong research capability. “You need a robust research platform that can both protect portfolios by helping investors avoid the wrong investments and identify attractive opportunities,” GomezBravo said.

When it comes to private credit, GomezBravo does not believe the asset class currently poses a significant systemic risk. “However, if you project forward a few years, there is a path by which it could become more systemic,” she said. “Today, the private credit market, particularly direct lending, is around US$2 trillion in size. Compared with public credit markets, which exceed US$12 trillion, it’s still relatively small.” While some investors may experience losses, she said that alone would not make private credit a systemic issue.

Ultimately, Gomez-Bravo believes the banking system will determine whether private credit evolves into a systemic risk. “At the moment, some private credit funds may experience difficulties and some investors may incur losses, but that doesn’t become a systemic problem unless it

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The renaissance in traditional ﬁxed income strategies

significantly affects the banking sector or creates broader contagion across credit markets. “For now, we’re relatively comfortable, but we’re monitoring those exposures closely. The key metric to watch is how much banks are lending to these entities because that will be an important signal as to whether systemic risks are emerging.”

Pilar Gomez-Bravo Co-CIO Fixed Income MFS

Olivia Grace-Curran Senior Wealth Journalist InvestorDaily

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Looking Ahead: Our closing thoughts

Looking Ahead: Our closing thoughts Throughout this edition of Ahead of the Curve, we have explored a broad range of topics shaping today’s fixed income landscape: from global bonds and portfolio construction to diversification, income opportunities and the evolving role of active management in client portfolios.

Josh Barton Senior Managing Director, Head of Australia and New Zealand MFS

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Looking Ahead: Our closing thoughts

As highlighted across these discussions, we believe that diversification remains one of the key considerations for investors navigating changing market conditions. Global fixed income can provide exposures to a wider range of sectors, issuers and opportunities beyond the domestic market, while potentially lowering portfolio volatility.

defensive positioning and long-term investment objectives.

For Australian investors who have been underweight global bonds, the current environment may present an opportunity to reassess portfolio allocations and consider how fixed income can contribute to both

At MFS, we believe active management matters, particularly in fixed income markets where careful security selection, risk management and global research can uncover opportunities that may not be reflected in benchmark-driven approaches. MFS has been investing actively on behalf of clients since 1924 and was among the early pioneers of active bond investing in the 1970s, helping shape the evolution of modern fixed income management.

Today, the firm’s integrated global investment platform brings together equity, fixed income and quantitative research professionals to support investment decision-making across markets and sectors. We hope this e-book has provided valuable perspectives to help support informed investment conversations and a deeper understanding of the role fixed income can play in diversified portfolios. If you would like to know more about MFS’ fixed income capabilities, click here.

MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537) holds an Australian financial services licence number 485343. MFS Australia is regulated by the Australian Securities and Investments Commission. This material is directed at investment professionals for general information use only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. Any securities and/or sectors mentioned herein are for illustration purposes and should not be construed as a recommendation for investment. Investment involves risk. Past performance is not indicative of future performance. The information contained herein may not be copied, reproduced or redistributed without the express consent of MFS Investment Management (“MFS”). While the information is believed to be accurate, it may be subject to change without notice. MFS does not warrant or represent that it is free from errors or omissions or that the information is suitable for any particular person’s intended use. Except in so far as any liability under any law cannot be excluded, MFS does not accept liability for any inaccuracy or for the investment decisions or any other actions taken by any person on the basis of the material included. MFS does not authorise distribution to retail investors. Unless otherwise indicated, logos, product and services names are trademarks of MFS and its affiliates and may be registered in certain countries.